The University of Michigan's Consumer Sentiment Index fell to 46.3 in early October, marking its third consecutive monthly decline and approaching the record low recorded in May. The drop reflects growing frustration among households over rising living costs tied to the Middle East conflict, high inflation, and elevated borrowing rates. The survey, released on Friday, found sentiment weakened sharply among lower-income consumers and those with smaller investment portfolios, while showing only modest gains among Democrats and Republicans. Overall confidence remains far below January levels.

The index tracking current economic conditions reached an all-time low of 44.7, down from 50.9 in September. Meanwhile, consumer expectations for inflation over the next year edged up to 4.7%, and five-year inflation expectations rose to 3.5%. These trends follow the Federal Reserve's September decision to raise its benchmark interest rate by 25 basis points to 3.75%-4.00%, its first increase in three years. The move was partly driven by energy price spikes linked to the Israel-Hamas war, which have contributed to broader inflationary pressures.

Economists surveyed by Reuters had projected the index at 47.8, making the actual result more pessimistic than expected. While consumer spending has remained relatively resilient, recent data show divergent patterns: nearly one-third of respondents anticipate maintaining usual spending on price-sensitive goods, 54% plan to reduce such spending, and 16% intend to stop purchasing altogether. Higher-income households are more likely to sustain spending, supported by strong equity market performance, whereas lower- and middle-income groups face tighter budgets.

James Baird, chief investment officer at Plante Moran Financial Advisors, noted that consumer frustration is likely to influence voter behavior ahead of the November 3 midterm elections. "It may not be evident in headline GDP figures, but it will be clear at the ballot box," he said. James Knightley, chief international economist at ING, added that spending could continue if equity markets remain stable, but risks escalate if market corrections occur. The Federal Reserve has indicated further rate hikes are possible, though recent labor market and inflation data have tempered expectations for immediate action.

The survey underscores a growing disconnect between aggregate economic indicators and lived financial experiences, particularly for households with limited financial buffers. While stock market gains have buoyed wealthier consumers, broader economic anxieties persist across political affiliations and income levels.